Market Not Punishing Negative EPS Surprises Reported by S&P 500 Companies for Q2

To date, 87% of the companies in the S&P 500 have reported earnings for the second quarter. Of these companies, 75% have reported actual EPS above the mean EPS estimate, which is below the five-year average of 77%. In aggregate, earnings have exceeded estimates by 3.4%, which is also below the five-year average of 8.8%. Given this underperformance relative to the five-year averages, how has the market responded to positive and negative EPS surprises reported by S&P 500 companies during the Q2 earnings season?

Rewarding Positive EPS Surprises

At this time, S&P 500 companies that have reported positive EPS surprises have seen a larger price increase than average.

Companies that have reported positive earnings surprises for Q2 2022 have seen an average price increase of 2.1% two days before the earnings release through two days after the earnings release. This percentage increase is much larger than the five-year average price increase of 0.8% during this same window for companies reporting positive earnings surprises.

In fact, if this is the final percentage for the quarter, it will mark the largest average price increase for S&P 500 companies reporting positive EPS surprises for a quarter since Q3 2019 (+2.2%).

Example: Netflix

One example of a company that reported a positive EPS surprise in Q2 and saw a substantial price increase is Netflix. On July 19, the company reported actual EPS of $3.20 for Q2, which was above the mean EPS estimate of $2.95. From July 15 to July 21, the stock price for Netflix increased by 18.4% (to $223.88 from $189.11).

Negative EPS Surprises Not Being Punished

In addition, the market has not punished S&P 500 companies that have reported negative EPS surprises on average.

Companies that have reported negative earnings surprises for Q2 2022 have seen no price change (0.0%) on average two days before the earnings release through two days after the earnings release. This percentage is well above the five-year average price decrease of 2.4% during this same window for companies reporting negative earnings surprises.

In fact, if this is the final percentage for the quarter, it will mark the first time the index has not seen a negative price reaction on average to negative EPS surprises reported by S&P 500 companies for a quarter since Q1 2009 (+0.3%).

Example: Amazon

One example of a company that reported a negative EPS surprise in Q2 but witnessed an increase in price is Amazon.com. On July 28, the company reported actual EPS of -$0.20 for Q2, which was well below the mean EPS estimate of $0.12. However, from July 26 to August 1, the stock price for Amazon.com increased by 17.9% (to $135.39 from $114.81).

Why is the Market Rewarding Positive EPS Surprises More Than Average and Punishing Negative EPS Surprises Less Than Average?

One factor may be that S&P 500 companies have been less negative in their outlooks for the third quarter than average. In terms of earnings guidance, 58% of the S&P 500 companies (42 out of 72) that have issued EPS guidance for Q3 2022 have issued negative guidance. This percentage is below the five-year average of 60% and below the 10-year average of 67%. Perhaps, the market is responding more to the earnings outlook for the current quarter rather than the earnings performance of the prior quarter.

Note: The FactSet Earnings Insight report will not be published on August 12, August 19, and August 26. The next edition of the report will be published on September 2.

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